Big Food’s exodus of leaders is a symptom of larger crisis

May 23, 2018

Campbell Soup CEO Denise Morrison is out, and — with that — the fifteenth CEO of a packaged food company has left their job since the beginning of 2016.

The parade of departures — which includes industry Kellogg's John Bryant and Mondelez International's Irene Rosenfeld — underscores the challenges to iconic food brands that had been grocery store staples for decades. They struggle to create growth in the face of upstart rivals, rapidly changing trends and their own slower-paced cultures. If they want to buy growth, there are limited and expensive options.

They are also a victim of their predecessors' success. The scale that once gave CEOs power at the grocery store and yielded cost savings now makes it harder to casually shift away from legacy businesses. Campbell could cut down on soup production, but it would still have the fixed costs of stocking and shipping.

It is, therefore, a challenge for a CEO to gather support from a company to shift its focus from namesake money-makers to bets on growth. That's even in the face of packaged food company sales slowing last year to 1.2 percent, according to Euromonitor.

"You need patience, trial and error," said Martin Roper, former CEO of the Boston Beer Company "and investors, analysts and even journalists don't have that patience."

Only private companies like Mars are allowed the runway to experiment with bets like its recent stake in bar-maker Kind, which valued the brand at at least $3 billion

The longest-tenured food company CEO is Joe Sanderson, the third-generation leader of poultry company Sanderson Farms. The second-longest is Irwin Simon, the founder and chief of Hain Celestial Group since 1993. Hain is under pressure from activists and has made its own attempts to sell itself over the years, sources have told CNBC.

After that, the third-longest serving CEO is Conagra Brand's Sean Connolly, who joined the company in 2015.

Looking for growth

Morrison, who became CEO of Campbell in 2011, joined the soup company in 2003 after stints at a number of consumer giants. But the task she faced was daunting. Today's diners want their food fresh, not with preservatives. They are suspicious, rather than impressed, by century-old brands.

At Campbell, the challenge is heightened by its largest shareholders, the Dorrance family. The family made its fortune on soup and, sources say, has been slow to accept the realities of soup's slowing fortunes.

Campbell's efforts to transform its portfolio on its own, like launching an organic soup line, failed to catch on with consumers. So it eventually turned to deals. Among them, it bought organic soup company Pacific Foods for $700 million and fresh food and drink brand Bolthouse Farms for $1.55 billion.

The goal of the latter was to help Campbell escape the doldrums of the center aisle of the grocery store, as today's shoppers head to fresher foods that surround the perimeter. The fresh business, though, floundered, leaving Campbell with a $619 million impairment charge this past quarter.

Part of the challenge was bad luck, a drought in California hurt the quality of Bolthouse's carrot crop.

Campbell, though, also faced the same difficulties other food companies have as they've looked to go into new categories through dealmaking. The soup company had little experience in the skill-set required for harvesting, fertilizing and planting.

Meantime, under Morrison, Campbell pursued another playbook followed to varying degrees of by peers like PepisCo, Coca-Cola, Mars and General Mills. It launched a venture capital arm, hoping to catch new trends — like kombucha and gluten-free — before they ate into its sales.

Several years into these efforts though, many of today's biggest successes, like Kind Bar, have originated outside such incubators. The culture of start-ups, where failure is inevitable, differs starkly from a publicly traded company tied to quarterly expectations and the need to show return on investment. And only a small fraction of start-up brands ever grow into anything large enough to make a dent in the sales of a big food company.

Many of today's savviest entrepreneurs are unwilling to tie themselves to Big Food themselves, intent on maintaining their renegade mentality.

Big deals

Desperate for growth, Campbell under Morrison looked for a deal to move the needle. But, once again like its peers, it struggled to find a company that was both growing and large enough to make an impact.

It forked over $4.87 billion to buy snacks company Snyder's-Lance to expand its foothold in the growing snacks category.

One of the deal's main architects, say sources, was Luca Mignini, one of the front-runners for the now-open CEO job. Morrison and the Campbell board supported it, they say. But as CEO, it was Morrison who took flack for its lofty price tag.

Through the deal, Morrison joined a club of food and beverage executives that have faced criticism for expensive deals. It that includes other CEOs, like Hershey's Michele Buck ($1.7 billion for Skinny Pop-parent Amplify brands), General Mill's Jeff Harmening ($8 billion for pet food brand Blue Buffalo), Dr. Pepper Snapple's Larry Young ($1.7 billion for Bai Brands).

Campbell paid a multiple of 21.5 times enterprise value to earnings before interest tax depreciation and amortization for Snyder's-Lance, according to Dealogic, slightly over the industry average of 20 times.

As companies seek growth and scale, bigger deals have leaped the most in valuation. The multiple for deals valued at more than $1 billion, jumped from 13 times EBITDA in 2016 to 20 times EBITDA in 2017, according to Dealogic. The multiple on deals valued below $500 million edged slightly down from 20 times to 19 times.

CEOs are therefore facing a damned if you do, damned if you don't dilemma. Don't do a big deal, and watch your sales growth whither. Do a big deal, and put yourself in the lion's den of investor scrutiny.

Those lofty valuations, which often bring companies into new categories, can create culture clashes too.

"There are many examples in which companies are perceived to have overpaid and the brand becomes nuclear internally. No one wants to be associated with it and its fate is sealed," said Chris Harned, a New York City-based partner with food and beverage firm Arbor Investments.

"However, there are also examples where buyers have fought through initial criticism ... and the deal price was vindicated."

The Snyder's deal closed in March and it's too early to evaluate its success, but it brings with it challenges. Its distributors have very different contracts than do Campbell's and its technology platform is likewise different, sources say.

Still, the soup company continues to support the deal — perhaps because it firmly believes in its rational, perhaps because that's what a company that just paid $4.87 billion ought to do.

"The recent addition of the Snyder's-Lance portfolio of brands and Pacific Foods, both of which I strongly supported, will enhance our growth potential as we expand into the faster-growing snacking categories and enhance our health and well-being offerings of soup and broth," interim CEO Keith McLoughlin told investors and analysts last week.

Critical review

Bankers have been pitching Campbell ideas to solve its challenges through mergers and acquisitions for years. Their ears perked up last week when incoming interim CEO McLoughlin told investors the company is considering a "thorough and critical" review of its business.

"Everything is on the table. There are no sacred cows," he said.

The company's review is still in an early stage, and it has not yet made any formal decisions. A Campbell spokesperson told CNBC, he "would not speculate on the outcome of [Campbell's] previously announced strategic review."

One option could be for Campbell to spin out its faster-growing snack business and take its soup business private, along with brands like SpaghettiOs. Doing so would allow Campbell to shield its soups' slowing sales from the public eye, but still take advantage of its profitability.

It would also follow a similar playbook as Kraft in 2012, when the food giant kept its cheese and grocery business and carved out the faster-growing snack business it named Mondelez International.

Campbell could also sell the entire company. Still, at an employee townhall last week, McLoughlin said his strategy is not to sell Campbell, even though as a publicly traded company it is always for sale, a source familiar with the situation told CNBC.

An oft-cited potential acquirer is Kraft-Heinz, who could find synergies and likely costs to cut. But Kraft-Heinz has learned the limits of its cost-cutting strategy and it's unclear the company wants to be saddled with Campbell's slowing sales.

It is also unclear the Dorrance family would be willing to hand over Campbell and its paternal culture to 3G Capital, the firm that backs Kraft-Heinz and which is known for their ruthless approach to cost-cutting.

A less frequently cited option could be a sale to candy and pet food company Mars, which could provide Campbell another path to escaping the scrutinizing public eye.

Campbell could take a less drastic approach, opting for a more straightforward sale of its Bolthouse packaged carrots business or brands like V8 juice and SpaghettiOs.